By R. Christian Bruce

Draft legislation that Senate Banking Committee Chairman Chris Dodd (D-Conn.) is expected to release during the week of Feb. 22 could put the much-delayed goal of financial regulatory reform within striking distance, analysts and industry experts told BNA Feb. 19.

The key, they said, will be whether Dodd's measure emerges in a form that can be meshed with a separate proposal expected soon from ranking Republican Richard Shelby (R-Ala.).

Although Dodd and Shelby recently broke off talks aimed at reaching a bipartisan approach to regulatory reform, the next two weeks are likely to show whether that effort can be revived.

Dodd and Shelby are drafting separate bills, and the key is whether their differing measures have enough in common to restart negotiations between the two senators.

If so, regulatory reform can move forward, propelled by sufficient agreement on issues seen as essential to a safer and more durable financial system.

But if action gets bogged down on a broad array of other questions, including the so-called Volcker rule, which would ban proprietary trading by firms that own insured depository institutions, that will be a sign that political concerns have outstretched the ability of the two sides to work out their differences.

"The key will be how close they are to each other," one industry expert told BNA. "The only path to successful legislation this year runs through Dodd and Shelby.

Everything else is a feint or an instrument to get you to that point."

Dodd's latest draft could be released as soon as Feb. 23, and is being set up for committee action March 3.

Risk Council Envisioned

Among other points, Dodd's measure is expected to call for creation of a council of regulators to oversee risks in and to the financial system. That council would be chaired by the secretary of the Treasury, with the chairman of the Federal Reserve Board as vice-chair.

Dodd spent much of the week of Feb. 15 on a trip to Central America with Sen. Bob Corker (R-Tenn.), a Banking Committee member with whom Dodd has been negotiating after the break-up with Shelby.

Corker's role, while keeping the talks on regulatory going, is still unclear over the long term. And in the end, several told BNA, the real accord will have to be found between Dodd and Shelby, because only they can bring both parties together.

"The only bill that can advance is a bipartisan bill, and for a genuinely bipartisan bill you need agreement by the leadership," one analyst said.

Even so, several told BNA that progress could be sluggish at best, and may serve only to cast in stark relief the many obstacles that still lie in the path of a bill.

For example, although there is wide agreement on the need to address certain issues, such as new resolution authority and risks to the system as a whole, the solutions to those questions spark fresh concerns.

Banking consultant Bert Ely said the reported plan by Dodd to have the Treasury Department head a new systemic risk council threatens to put a political tint on the regulatory process.

"A long-standing premise of financial regulation is the notion of independent regulators, and this could make it more political. I think there's going to be a lot of pause among Republicans, and questions about what this will apply to and what the triggers will be," Ely said.

Hurdles Still Place

And other long-standing disputes are still very much alive, including how best to address consumer protection. A bill (H.R. 4173) passed by the House in November would establish a new and independent Consumer Financial Protection Agency (CFPA), but the idea has met with resistance in the Senate, and is a major point of disagreement between Dodd and Republicans on the committee, as well as some Democrats.

But the proposed CFPA still commands strong support elsewhere, including from House Financial Services Committee Chairman Barney Frank (D-Mass.), who recently told Bloomberg News that he still considers an independent CFPA essential to regulatory reform legislation. 

Dodd will have to find an almost perfectly balanced solution, Federal Financial Analytics Inc. said in a Feb. 19 note to clients.

"It's clear—as it's been for weeks—that the two sides of the aisle can't agree on the Consumer Financial Protection Agency so dear to the Administration's heart. So, whatever Sen. Dodd does here will be in hopes of something he can pass through his panel and on the Senate floor without too much loss of face to his left, not something anyone on his left will much love," Federal Financial Analytics said.

Meanwhile, trade groups hope an accord can be reached soon.

Erica Hurtt, vice president for government relations and communications at the Financial Services Forum, said ongoing uncertainty about reform "is undermining the economic recovery that job creation depends on."

"The financial services industry is eager to move forward within a modern and more effective regulatory framework and play our part in a robust economic recovery," Hurtt said Feb. 19.